In the recent case of Cash Generator Limited v Fortune and others  EWHC 674 (Ch), the High Court considered the validity and consequences of liquidators who had been appointed following a failure to fully comply with the creditors’ voluntary liquidation nomination process set out in section 100 of the Insolvency Act 1986.
Creditors’ voluntary liquidation (CVL) is a procedure instigated by an insolvent company by which its assets are sold and the proceeds distributed to its creditors. Usually, a company goes into CVL after its directors realise that its liabilities exceed its assets or it cannot pay its debts as they fall due and so the company cannot carry on its business.
Full details of the procedure are contained within the Insolvency Act 1986 (the IA 1986) but in summary a company goes into CVL when its members pass a special resolution for its winding up, with a majority of at least 75% (section 84, IA 1986 and section 283, Companies Act 2006). The CVL is deemed to commence from the passing of this resolution (section 86, IA 1986).
Under rule 6.14(2), the directors must seek the creditors’ decision regarding the nomination of a liquidator at a virtual meeting or under the deemed consent procedure. The notice seeking the creditors’ decision must contain the information required in rule 6.14(8) of the IR 2016 and rule 15.7 (if using the deemed consent procedure) and rule 15.8 (if using a virtual meeting). The notice is to be sent to all the company’s creditors whose address the liquidator is aware of (rules 15.11 and 1.37(1), IR 2016).
Should the creditors’ choice of liquidator be different from that of the members, the creditors’ nomination prevails (section 100(2), IA 1986). If the directors fail to seek a nomination from creditors, any liquidator who has been nominated by the members must apply to court for directions on how to remedy the default within seven days of becoming aware of the relevant failure on the part of the directors (section 166(5), IA 1986). In these circumstances, the liquidators’ powers under that appointment are limited (section 166, IA 1986).
Rule 6.14(13) of the IR 2016 provides that a director who is in default of seeking a decision on the nomination of a liquidator is guilty of an offence and is liable to a fine. Section 430 of the IA 1986 and Schedule 3 to the IR 2016 prescribe the relevant punishment and fine.
The companies had been franchisees of the applicant, a creditor. Under the franchise agreements, and if the companies ceased to trade, the applicant had the right to enter the companies’ premises and operate their business. It could also require the companies to give up possession of their premises and transfer their assets to the applicant. However, the companies had purported to assign their leasehold interests in the business premises to a third party before entering into a CVL. The companies had appointed joint liquidators, under the deemed consent procedure, but had not given notice to the applicant.
The applicant claimed that the liquidators’ appointment had not been carried out properly as the notices (required under the deemed consent procedure) had not been delivered to the applicant (or the, employees and landlords), and that this was a mandatory part of the decision-making process. Regardless of whether failure to give notice to the applicant was deliberate or not, the applicant claimed that non-compliance meant that the liquidators’ appointment was invalid as the liquidators had not been properly nominated by the creditors (and therefore did not have the full powers prescribed by section 165 of the IA 1986). As such, the applicant argued, the court must intervene and either order the removal and appointment of new liquidators (under section 108, IA 1986) or compliance with section 100(2) of the IA 1986.
The liquidators had subsequently agreed a sale of stock and the companies’ assets (which was at the heart of the applicant’s challenge to the validity of the liquidator’s appointment). So, in the alternative, the applicant claimed that the liquidators should be removed and replaced because investigations were required into the leasehold assignments and the asset sales and the officeholders were either conflicted or unwilling to investigate.
The applicant applied to court for relief in the form of the reversal of the nominations of the liquidators or, alternatively, their removal from office and the appointment of other insolvency practitioners as liquidators (either by the court or through nomination by creditors).
The High Court dismissed the creditor’s application. It held that, on its proper construction, the consequence of non-compliance with the deemed consent procedure was the directors’ commission of a criminal offence. Although the imperative had been used in the relevant legislative provisions, and a binding statutory obligation created with which directors must comply, there was no reference to invalidity of appointment or provision for such consequences (including, for example, an indemnity for the officeholder or validation for duties performed).
In the circumstances, the High Court concluded that it was reasonable to assume that Parliament had not intended invalidity absent an express provision; an interpretation which was entirely consistent with policy and practicality.
Following their appointment, the liquidators had received expert professional advice and valuations regarding the sale and had carefully considered it from a commercial perspective. There was no allegation of dishonesty and no business to sell as a going concern: the liquidators’ fire sale of the companies’ assets was inevitable and proper in the circumstances to fulfil their statutory function.
Further, there was no reason to conclude that the liquidators would not investigate the lease assignment as suggested by the applicant. The liquidators had retained solicitors and there was no apparent conflict of interest. Subsequent legal advice obtained by the solicitors had confirmed that the company’s lease assignments were effective and valid and the leases had no premium value.
In all the circumstances, the creditor had simply not adduced evidence to establish a cause to remove the liquidators from office.
This is the first reported case where a failure to fully comply with the deemed consent procedure in the context of a CVL appointment (or indeed in the context of any insolvency appointment) has been considered.
It is worth noting that a creditor decision process for appointing a liquidator had been adopted; it had just not been fully complied with in the sense that notice of the decision had not been given to the creditor applicant (and certain other creditors).
Rule 15.15 of the IR 2016 provides that where a decision is sought by a decision notice, the decision procedure or deemed consent procedure is presumed to have been duly initiated and conducted, even if not everyone to whom the notice is to be delivered has received it. The court relied on this rule when adopting its purposive construction and concluding that it could not have been Parliament’s intention that non-compliance with the deemed consent procedure would result in an invalid appointment. The outcome might have been be different if the wrong decision-making process had been adopted or the procedure had not been followed at all.
The High Court also, sensibly, recognised that the purpose of the new decision-making procedures (and, in particular, the deemed consent procedure) is to encourage creditors’ participation by allowing creditors to have their say without having to attend a physical meeting. In light of this, it would have been be surprising if an omission by the company (or its directors) in the technical process nullified a decision which the creditors who had participated in the process had made.
This case provides a useful step-by-step guide to the application of creditor decisions in the context of a CVL appointment, which practitioners may find helpful. The High Court was critical of this aspect of the IR 2016: the complexity of the creditor decision requirements and the need to look in so many different places to comply fully (suggesting the IR 2016 could be consolidated for an easier practical application). However, any consolidation seems unlikely any time soon
For any further enquiries regarding this case or for general insolvency enquiries please contact Lauren Hartigan-Pritchard on 01905 677045 or firstname.lastname@example.org